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Coachcoh -0.7246376811594203%Coach Inc.U.S.: NYSEUSD38.36
-0.28-0.7246376811594203%
/Date(1481301904777-0600)/
Volume (Delayed 15m)
:
208580
P/E Ratio
22.392441860465116Market Cap
10831255961.7236
Dividend Yield
3.505127872257562% Rev. per Employee
297954More quote details and news »cohinYour ValueYour ChangeShort position
these days are "magic and logic"—the blending of ideas, design, and creativity with rigorous knowledge-based decision making. That duality is personified by the company's leaders, old and new: Chairman and CEO Lew Frankfort and President and Chief Commercial Officer Victor Luis, who is set to take the baton from Frankfort in January. A 34-year veteran at Coach (ticker: COH), Frankfort built the company into a $16 billion global retailer of handbags and accessories.

Seated in a small, white conference room at Coach's New York headquarters, Frankfort, 67, dressed in slacks, vest, and an open-collar shirt, fairly crackles with charisma and energy. Luis, 47, in his familiar jeans, is more pensive, fingers to his lips, speaking of design and data with equal passion and precision. Luis joined the company eight years ago as the head of Coach Japan and directed Coach's very successful expansion into China.

"My new role," says Frankfort, "is to partner with Victor to drive the transformation; I'll provide counsel and strategy. I have every confidence that under our leadership, Coach will resume growth."

The handoff will take place in less than a month, with Frankfort becoming executive chairman. Coach has been selling Frankfort and Luis as a corporate duo, betting that their personalities and skill sets will complement each other enough to spark the 72-year-old company through one of the most crucial periods in its history. Consumer spending is pinched, as the economy still searches for its legs, and after several years of double-digit growth, sales are slumping, hurt by competition from the likes of
Michael Korskors -0.43469670025686624%Michael Kors Holdings Ltd.U.S.: NYSEUSD50.39
-0.22-0.43469670025686624%
/Date(1481301883691-0600)/
Volume (Delayed 15m)
:
278830
P/E Ratio
11.606896551724137Market Cap
8312540467.52746
Dividend Yield
N/ARev. per Employee
368215More quote details and news »korsinYour ValueYour ChangeShort position
(KORS). Indeed, concern about weakening sales amid competition has dropped the former growth stock into the bargain bin, where, at $56, it's selling for 16 times forward earnings estimates.

Some investors are snapping up the shares, betting that they can get to $70 in two years. These bulls figure that Luis is the right man to continue leading the company's transformation into a global lifestyles brand from mainly an accessories and handbag maker. "I like the fact that he recognizes the need for a change," says Ann Miletti, senior portfolio analyst with Wells Fargo Asset Management. "Clearly, the brand needed to be refreshed and expanded into lifestyle, and he has the capability," based on his record at the company.

Luis is also expected to keep expanding into promising growth areas, such as ready-to-wear and men's accessories, seen as a $5 billion global opportunity.

Coach, which got its start as a leather-goods maker in a Manhattan loft in 1941, says it has a leading 29% share of the $10.3 billion U.S. premium handbags and women's accessories market. The company now offers all manner of accessories—including belts, handbags, wallets, and watches—in more than 1,000 retail locations, mostly in the U.S. and Asia. Women's handbags generate 58% of sales. Frankfort helped create the accessible luxury market, with classic, well-made handbags that now average slightly less than $300, though some go for well above $1,000. Coach shares have soared more than 25-fold since the company went public in 2001.

Coach's success, not surprisingly, has spawned challengers, lured by its industry-leading gross profit margins of more than 70%. In the past three years, Michael Kors has captured an estimated 16% of the market, up from the mid-single digits.

LUIS HAS REPEATEDLY said that expanding Coach overseas—especially in China, where sales increased over 35% in the September quarter—is one of the key pillars of growth for the retailer. Japan, where the company expanded aggressively and now operates 190 stores, also strikes Coach as a long-term growth market, thanks to its effective economic policies. In the short term, however, sales declined 2% in constant currency in the September quarter, and Luis says that the pending increase in the consumption tax in Japan to 8% from 5% is causing the company some "anxiety." Still, Coach plans to open five to 10 stores—mostly men's—in Japan in fiscal 2014.

Born in Portugal and raised in Rhode Island, Luis points out that his personal experience "gives me broad strategic vision" in building brands globally. Most analysts agree. "Luis brings an abundance of experience running an international business to the CEO position, which we view as critical to the company's future," John D. Morris, senior retail analyst with BMO Capital Markets, wrote in a recent report.

For now, international is a mixed bag. In the recent quarter, Coach reported that sales declined slightly in international business, from which it gets 32% of revenue, or $365 million, mostly due to weak yen. The segment grew 9% in constant currency, thanks to China, which enjoyed double-digit comparable-store sales. Coach plans to open 30 new stores in China this fiscal year, bringing total locations to 156. The company expects China sales to reach $530 million this year, or roughly 10% of total sales, from $430 million in fiscal 2013, which ended in June.

One of the key people that Luis will turn to in the transition is Stuart Vevers, the former creative director at Spanish retailer Loewe. Recently hired as executive creative director, Vevers replaces long-time designer Reed Krakoff, who resigned this summer after he and a group of investors bought back the Reed Krakoff brand from Coach. That's a good thing, according to Morris of BMO. Vevers will focus exclusively on Coach, he explains, "whereas we believe Krakoff's balancing act between his namesake line and Coach proper" hurt new-product development.

In their interview with Barron's, Frankfort and Luis candidly admitted that Coach had been slow to react creatively to the rising competition, opening the door for rivals to nip at the company's market share. Most notably, Kors' edgy and fashion-forward bags and sexy black military-style dresses are helping drive 25% same-store gains at that company, even as Coach reported flat-to-negative sales in recent quarters.

The Coach "product and brand got too functional and lost the romance a luxury brand requires," explains independent retailing consultant Marie Driscoll. "In terms of product quality, Coach offers much more bang and bag for the buck, but the brand just isn't sexy now. Sizzle sells, and Michael Kors has it."

VEVERS DESIGNS WON'T hit the market until next fall, but the new products Coach is bringing into stores this spring, and which Barron's previewed, already represent a promising departure from some of the current items, which frankly look a bit stale. Upcoming bags, for example, will revert to classic, clean design with an understated logo and smart use of materials such as embossed ostrich leather. The Borough bag in pebbled leather, for instance, which Luis is especially excited about, is selling well at $548 and comes in various sizes, such as large and mini; the new version features tanned cowhide with stripes in muted colors.

Luis aims to continue Coach's focus on factory outlets, though some critics grouse that selling aggressively to outlets is denting the brand's cachet. The company is growing square footage at its factory, and for good reason. The 193 outlets account for up to 60% of the retailer's North American sales, according to analysts, and are very profitable. Rents are low, and the materials the company uses in the products are less expensive than those used for its core products.

The Bottom Line

Coach's stock could climb 25% in two years, to $70, as new CEO Victor Luis transforms the firm.

All that sits well with Ariel Investments, which bought Coach shares earlier this year in the mid-$40s, betting that in the next three to five years, the retailer will regain its magic. In the nearer term, Ariel thinks that Coach could earn $4 a share in fiscal 2015. Affixing a 18-times multiple to that estimate, which is in line with the company's 10-year valuation average, Ariel analyst Jamil Soriano comes up with a $72 stock, about 30% upside from the current price. That is still below the $77 Coach hit last year. "It was a good opportunity to take a stake in a solid brand" going through short-term head winds, says Soriano, whose firm owns roughly one million shares. "I think they have a solid plan in place."

One part of the plan is likely lowering the bar so new management can leap over it. After reporting disappointing fiscal first-quarter results, including a 7% drop in North American same-store sales, due to weakness in handbags and slow store traffic, Coach guided results lower for the current year, saying it expects same-store sales to fall to high single digits and overall sales to drop to low single digits. Coach, which has 351 retail stores, is still planning to grow square footage globally about 9% and open 20 new stores in North America. Analysts now expect the retailer to earn $973 million, or $3.48 a share in fiscal 2014, down from $3.73 last year. Revenue is expected to come in almost flat, at $5.1 billion.

Coach generated $1.2 billion in free cash flow last year. It has little debt and $854 million in cash and equivalents on its balance sheet.

Coach has been aggressive at returning cash to shareholders. Since initiating its first dividend in 2010, it has raised it four times. The stock yields 2.4%. And over the past 5½ years, Coach has reduced shares outstanding by more than 25% through buybacks.

Along with a snappy Coach clutch, a few Coach shares might make great stocking stuffers. The smart bet is that under Luis, Coach will become fashionable again, on Main Street and Wall.